The United States taxes its citizens and green-card holders on their worldwide income, regardless of whether they live in the US or not. This is because US tax liability and filing obligations are generally based on citizenship, not residency. As a result, if you’re a US citizen who is a resident in Canada, you’re required to file both a Canadian and a US income tax return (certain exceptions may apply), even if you owe no US tax.
In addition to the requirement to file a US income tax return, US citizens living in Canada may also need to disclose a substantial amount of other financial information to the US government. For example, the Report of Foreign Bank and Financial Accounts (FBAR) form needs to be filed by US citizens, regardless of where they are resident, if they hold foreign (i.e., non-US) financial accounts with an aggregate balance of over US$10,000 at any time in the year. Foreign financial accounts include Canadian bank, investment, and registered accounts such as RRSPs or RESPs as well as TFSAs. The penalties for not filing this form when required can be severe.
If you are a US citizen living in Canada, and you are not up to date with your required US filings, there are special voluntary disclosure programs that will allow you to come into compliance with your US tax reporting obligations. In some cases, all related penalties may be waived (although interest will still apply to previously unpaid US taxes). Recent expansions to these programs provide further opportunities for you to come into compliance.
The Streamlined Foreign Offshore Procedures (SFOP), for example, is a program which applies to US taxpayers living outside of the US.1 The program applies both to US taxpayers who have not filed required US income tax or information returns, as well as to those who have filed but have failed to report certain income.2 In all cases, the failure to file a return or to report certain income must have resulted from non-wilful conduct. Under this procedure, the required submissions include complete income tax returns (including all required information reporting forms) for the last three delinquent years, six years’ of delinquent FBARs, certification that the failures to file were non-wilful, and payment of taxes due plus interest. However, all penalties are waived under this program.
If you are a US citizen living in Canada, you should discuss your US filing obligations with your tax adviser and if you’re not up-to-date with your required filings, discuss your available options.
1 Subject to certain conditions
2 Prior to the recent expansion of the program, this program was limited to those who had not filed any US tax returns since January 1, 2009 and represented a low compliance risk.